Silver has rallied to a new high after touching the $26 area, identified in this column as a level to buy. With the strong breakout, it’s time for buyers to move their stop-loss level and lock in profits.
In our article dated January 25, we had mentioned that silver was in a corrective mode and the $26 level would be a support area to go long. Prices hit that level and zoomed out to a new high. We were looking at the mini-sized silver contract (Symbol: YI), with each contract worth 1,000 troy ounces. Equity traders can buy SLV, the silver exchange-traded fund listed on the stock exchanges, and track the futures contact.
Investors who bought at $26 can now move their stops up to $29 to lock in $3 in profits. The price of silver is moving up at a rapid pace but anyone buying now also faces the risk of a rapid sell-off. People who missed the rally should ideally wait for prices to correct back to the $30 level before buying. At the time of writing this article, the prices were at $34.
We had recommended getting into silver much earlier, when prices had broken the $22 resistance level. At that time, we had also mentioned that silver had potential to rally much higher than gold, given the white metal’s historic price action. This has been proved right. Fundamental analysts attribute the rally in silver to the crisis in West Asia and investors seeking safe haven. However, remember that the rally began at the $26, which was identified as a potential area of a bounce before the West Asian crisis began.
Had crisis been the real reason, one would have seen a strong rally in gold and the dollar, as both these asset classes are seen as safe havens. That has not happened, as silver continued to rally. Gold did not touch a new high and was trading at $1,400 at the time of writing this article. The all-time high around $1,435. Hence, we would discount the West Asian crisis theory and look at what the chart is telling us.
Based on the chart pattern, so far silver can reach the $39 level. This is a 50 per cent jump from turning point of the white metal at $26. The only worrying issue about the price action is the strength of the rally. In our experience, it shows a lot of retail buying, which often tends to be a precursor to a strong sell-off. Hence, we would have our stops in place to lock in profits.
The target of $39 is arrived at using the measured move. Technical analysis states that markets tend to replicate previous moves. During the last rally, silver moved from $18 to $31 over a $13 move. Replicating that move from the recent low of $26 puts the target of silver at $39.
Many people may have missed the rally and are itching to get in. We would, however, wait for prices to come back to the $30 level before buying. But, it’s possible that price may never reach that level and, in that case, just let the trade go and look for other opportunities.
However, there are some other higher risk entry points that one could consider. Remember that these levels have a greater risk of a stopout, as these are weak support levels. These areas include 33.40, 33, 32.40 and 31.77. After that, we would wait for prices to fall to the 30.50 level before considering a buy.
The author is based in Chicago and is the editor of www.capturetrends.com
